Cable Seeks Government Help

NEW YORK ( TheStreet) -- When an industry moves its annual conference to Washington, it wants that to be seen as a sign of strength. Its ability to hire bureaucrats that represent its interests, and get politicians to appear before it, is meant to make opponents fear its might.

But tech reporters know this as a sign of market weakness. If you're running to government for help, the market is saying some very bad things. It is wise to ask what those bad things are.

This week, the National Cable Television Association was in Washington, paying the big bucks for cramped quarters midway between the White House and the Capitol. The group is now headed by former FCC chairman Michael Powell, and acting chair Mignon Clyburn also spoke.

The industry wants a lot of favors from Washington. It wants the Department of Energy to back off on setting efficiency standards for set-top boxes, writes Broadcasting & Cable.

Mainly, however, it wants regulators to look the other way while it uses its vertical integration to crush Internet-based competitors such as Netflix ( NFLX).

The head of Time Warner Cable ( TWC) was frank in discussing this with analysts, including Bloomberg. The industry is writing contracts for content that explicitly keep those shows off the competing technology, or require that cable get the same pricing.

It wants to protect the existing pay TV "ecosystem," in which consumers pay $150 a month and more for bundles of channels they do not watch, in order to see those few channels they do watch.

As Powell told a Senate subcommittee during the show, according to Advanced Television, the largest subscription video service in the country isn't Comcast ( CMCSA), Time Warner Cable or DirecTv ( DTV). It's Netflix.

The reason is simple. Netflix charges $8 a month, a tiny fraction of what cable charges. The same is true for the other Internet-based services, some of which, like Amazon.Com ( AMZN), actually charge a la carte for individual shows.

Powell wants the government to look the other way while cable uses its power in Hollywood against this Internet threat. Even as he spoke, major studios were refusing to renew their Netflix contracts, in an effort to dry up its flow of content. Cable paid for that content, Powell warned -- you wouldn't want anything bad to happen to Mad Men, would you?

Vertical integration makes this counterattack possible. All four broadcast networks own multiple cable broadcasters, and when they sell these outlets rights they're basically paying themselves, a deal guaranteed to bring a profit. Comcast itself is now one of those networks, and one of those studios, through NBC Universal.

This is the just the kind of cozy relationship the government broke up more than 60 years ago, when movie studios owned their own theaters. The studios collapsed, and the cable industry now says they will collapse again unless vertical integration can be used against the threat of Internet delivery services.

But when the studios were broken up, did that end entertainment? Didn't we all just turn on TV, even when shows were controlled by commercial sponsors? Didn't the market work? Didn't Hollywood actually get richer than ever, with a programming outlet now in every home, however poor the quality compared to what you might see in a movie theater?

I think it did. Cable showed the weakness of its market case this week, and that's the story investors need to take home with them.

At the time of publication, the author had no investments in companies mentioned here.